The Manufacturing sector is near and dear to my heart but after spending over 20 years working in this space, I came to the conclusion a while ago that manufacturing jobs, as we have characterized them in the past, are not coming back to the US and there is a recent global study that has validated that assumption.

The McKinsey Global Institute has released a study about the future of manufacturing and it is required reading for anyone in that industry as well as policy makers in developed countries.

As countries develop and the Free Market drives companies to seek the lowest cost manufacturing of their products, low skilled/labor intensive jobs move to developing countries.  We’ve seen this in the US as well as other developed countries and this explains the rise in manufacturing in such countries as China.  The following graph from the McKinsey study shows that as a country’s GDP per Capita (a metric showing a country’s growth) increases, the share of manufacturing jobs decreases as a percent of the total.

As I have stated before, this is not necessarily a bad thing.  As a country develops, the lower skilled/lower pay jobs are farmed out to other countries but the high skills/high pay jobs remain in the developed country.  I’d rather have the sweatshops reside in China while keeping the higher skilled jobs in the US since those jobs are safer, have higher salaries and require a more educated public.

The following graph shows how manufacturing in all groups has declined but the labor intensive field has declined far worse.

Again, this should not be a shock or cause for alarm for those of us who believe in the Free Market.

There are several reasons for the decline in labor intensive manufacturing – lower cost labor in developing countries, government regulations (i.e. OSHA), tax advantages, etc. – that would force a company to move jobs to a developing country which decreases the amount of labor intensive jobs in the country.  But there is another reason labor intensive jobs are decreasing in the US and other developed countries – increased productivity.  Advances in factory automation have led to gains in productivity which is good for the company but bad for low skilled labor.

The following graphic shows that the manufacturing sector has contributed 37% of the productivity growth from 1995 to 2005 but manufacturing is responsible for -24% of Job growth from 1996 to 2006.

The money quote is here:

“Two key priorities for both governments and businesses are education and the development of skills. Companies have to build their R&D capabilities, as well as expertise in data analytics and product design. They will need qualified, computer-savvy factory workers and agile managers for complex global supply chains. In addition to supporting ongoing efforts to improve public education—particularly the teaching of math and analytical skills—policy makers must work with industry and educational institutions to ensure that skills learned in school fit the needs of employers.”

The decline in Union membership has a direct correlation to the decline in manufacturing as a percent of GDP and we should not pine for those days when the US was the only game in town with regard to low skilled/labor intensive manufacturing.  We live in a global economy and the US has far more competition for low skilled manufacturing jobs so those days are gone and they are not coming back!  I have written about this before and here is the graph showing the close correlation between Union memberships and Manufacturing jobs as a percent of GDP:

While employment in the manufacturing sector will remain low, it is important to have a manufacturing sector in the US.  Manufacturing goes hand-in-hand with development and if we lose the ability to manufacture widgets (cars, TV’s, computers, tanks, airplanes, etc.) in the US then we’ll soon lose the ability to design/develop those widgets.  It is a matter of national security and economic livelihood to maintain at least a minimal manufacturing sector in the US.

The US should focus on Science, Technology, Engineering and Math (STEM) education starting in elementary school to develop a talent pool equipped to meet the needs of manufacturing in the 21^st century.  This should’ve been done 20 years ago but it’s still not too late.

The ideal model is to have a large pool of R&D scientists, Engineers, Technicians and skilled operators employed in the US to develop products, get them started up in the US factories and transfer them to lower cost manufacturing sites in developing countries once the products are mature.  This model allows the valuable technical resources in the US to remain focused on new product development and innovation that will lead to market capture and increased company profits.

The next decade is critical to US manufacturing and if we can have the courage to confront the brutal fact that low cost, low skilled manufacturing jobs aren’t coming back, then we can be successful in the future.